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Business Cycle Debate

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Business Cycle Debate

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About this activity

This activity is geared towards seniors studying the debate between the Austrian and Keynesian schools of thought about the business cycle. Note: the video uses alcohol as a metaphor for government credit and spending. This may be inappropriate for younger viewers.

Created by

Brad Poston
Brad Poston
United States

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Business Cycle Debate
 

Business Cycle DebateOnline version

This activity is geared towards seniors studying the debate between the Austrian and Keynesian schools of thought about the business cycle. Note: the video uses alcohol as a metaphor for government credit and spending. This may be inappropriate for younger viewers.

by Brad Poston
QR
1

Both F.A. Hayek and John Maynard Keynes are giants in economics. Who does the video suggest is more popular today?

2

According to Keynes, the best way to respond to economic downturns is to:

3

What did Keynes consider to be means by which the government could increase consumption?

4

True or False: Keynesians believe the government should attempt to steer markets to prevent a crash like the Great Depression.

5

According to Hayek, what is the consequence of following Keynes theory?

Select one or more answers

6

According to Hayek, a crash in the business cycle is caused by:

7

According to Hayek, what problems are created by the government lowering interest rates?

Select one or more answers

8

True or False: the main point of Hayek's Noebel prize winning essay "The Fatal Conceit" is that governments can't really steer the economy.

Explanation

While Hayek and the "Austrian" school of economics continue to have influence, most public policy theory today in developed countries is driven by Keynesian economic theory.

Keynes believed economic growth was driven by consumption. If the economy was performing poorly, he believed that the government should increase spending to boost total consumption (aggregate demand) by the economy as a whole in order to jump start growth in the economy again.

All of these would work according to Keynes. Although Keynes did not directly advocate starting wars simply to help the economy, many Keynesians argue that government spending in WWII is what ended the Great Depression in America.

Ultimately, Keynesians believe that well-timed deficit spending and low interest rates set by the government can keep economies from experiencing the sharp downturns in the business cycle and promote steady growth.

Hayek argued that the money used by the government to stimulate growth would have to eventually be paid for by taxpayers in the future at a higher rate due to large public debt. In the meantime, government spending projects tend to divert money toward political supporters rather than market efficiency and potentially encourage bribery and graft.

Hayek believed that artificially low interest rates set by the government created a rush of consumption that looked like growth in the short run but caused a crash in the long run.

One of Hayek's most important observations is that the market coordinates the activities of consumers with producers. When consumers invest money, they forgo buying goods and services to make money available to businesses. When the government decreases interest rates (and thereby increases credit), it creates the illusion that there is more money to invest in the economy (artificial savings created by debt). As a consequence, businesses start new capital projects (like building factories). The problem is that consumers aren't really saving - the investment money is coming from debt. As long as the money supply increases, both businesses and consumers can increase spending, but eventually both end up trying to consume the same resource at the same time causing a market crash. The stimulus boom creates a bust as the market corrects.

At the end of the day, Hayek believed the economy was too complex for the government to accurately manage it. Attempts by the government to force the economy in one direction or another always produce unanticipated and self-defeating consequences.

 
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